CHIPS: US Kills China Deals to Buy Xcerra, Chicago Stock Exchange

Bottom line: Two new vetoes for Chinese
purchases of US microchip and financial companies are the latest
signals the Donald Trump administration intends to use such vetoes
to fight for a more balanced trade relationship.

What started as a trickle of
dying cross-border deals involving Chinese buyers of US assets is
showing signs of becoming a flood, with two new vetoes hitting the
headlines. The latest of those is from the all-too-familiar
high-tech chip sector, and has US chip maker Xcerra (Nasdaq: XCRA) saying it is scrapping its plan
to be purchased by a Chinese buyer after failing to win clearance
from the US national security reviewer. In a related vein,
the Chicago Stock
Exchange earlier this week
scrapped a similar deal due to objections from the US stock
regulator.

This pair of collapses extends a recent string of similar
developments that actually dates back to the Obama administration.
But the pace is clearly picking up under current President Donald
Trump, who has made no secret of the fact that he wants to see a
more level playing field in US-China trade relations. Whether or
not these deals represent a real security risk is open to
interpretation. But regardless, Trump is making it clear he will
use this pretext to block deals in the sensitive financial and
high-tech sectors.

According to the latest headlines, Xcerra is saying it is
cancelling its plan to sell itself to Hubei Xinyan Equity
Investment Partnership for $580 million due to failure to
get clearance from the Committee on Foreign Investment in the
United States (CFIUS). (company
announcement) The deal was first announced nearly a year ago,
so it does appear that this national security review was what was
slowing it down for so long.

Xcerra said that CFIUS didn't actually outright veto the deal,
but instead simply made clear it wasn't going to give it the green
light, prompting the two sides to abandon the purchase. Not
surprisingly, Xcerra shares fell nearly 3 percent in after-hours
trade on Wall Street after scrapping of the deal was announced, and
are now just about back at their levels from before the deal was
first disclosed last April.

Next there's the Chicago Stock Exchange story, which has dragged
on for even longer. That deal was first proposed nearly two years
ago when Obama was still president, and raised quite a few eyebrows
at the time due to the Chinese origin of the buyer, a company
called Casin. No one really though too much of it,
since the Chicago Stock Exchange is a non-player in the U.S.
securities market.

Insufficient Oversight

The deal appeared set for passage, despite a few words of
protest from politicians that you would normally expect. But then
the Securities and Exchange Commission abruptly
said it was delaying a decision on approval indefinitely last year
for unexplained reasons. Now apparently the SEC has made up its
mind and decided to formally block the deal. In announcing the
decision, the SEC said it was concerned "whether the proposed
ownership structure will allow the Commission to exercise
sufficient oversight of the Exchange." (English
article)

Casin had originally said it hoped to reposition the exchange as
a listing ground for Chinese companies, presumably smaller ones
that lacked the resources and financial savvy to do more
conventional listings on the Nasdaq and New York Stock Exchange.
But that raised red flags to many, which in my view were justified,
who were concerned the exchange could become a hotbed for financial
shenanigans that could ultimately end up duping unsuspecting US
investors.

The Chicago case appears to be significant, as it's the first I
can recall where a deal was vetoed by an agency without links to
CFIUS. In this case it's hard to say whether Trump people leaned on
the SEC to make this decision, since I honestly do feel there was
genuine concern about what might happen to the Chicago Stock
Exchange if the deal had been completed.

But I'm sure the SEC won't be catching any flack from Trump or
his administration for this development. That could translate to
more active roles by a wider range of government agencies that have
a chance to review cross-border deals. According, I do expect these
latest developments will put a huge chill on any future Chinese
attempts to buy major US high-tech or financial firms.